Nonseparable preferences and optimal social security systems
By: BorysGrochulski, Narayana Kocherlakota.
Contributors: Kocherlakota, Narayana Rao, 1963-; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13362.; Working paper series (National Bureau of Economic Research) -- working paper no. 13362.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 39
Subjects: Assets (Accounting) -- Taxation
Description: In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.
Notes: "September 2007"

Includes bibliographical references (p. 39).

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